Suppose you’re 20 years old and you can either take a loan out to go to college or use that money to buy a house. Which is the better investment?
Once, this question sounded like a no-brainer. College was the golden ticket in the modern economy, the clear path to a better standard of living. But there is a narrative brewing among pundits and some economists arguing that because many millennials are facing thousands of dollars in student debt they won’t be able to buy a home. And now they may be regretting their choice and embracing politicians who promise to wipe away their debt.
But millennials who went to college can take heart they likely made the right decision, even if they are coping with student debt and have no home to show for it. The economy still rewards education. Not only that, it pays college graduates a premium for living in an urban area that has higher housing costs. Those same costs make buying a house before the age of 30 harder, but investing in the skills and networks that go into being an urban, educated worker early in your career will have financial payoffs greater than owning a home.
Home ownership pays off, but not that much
It has been a relatively recent development that homes are viewed as an asset. For most of human history they were simply a place to live. Bob Schiller, the co-creator of the Case-Schiller housing index, argues that once housing price data became more available Americans began to see their home as an investment. Increased land scarcity also drove up prices and the returns from home ownership. This may be why up until the 1960s, home prices did not increase much after accounting for inflation. Schiller estimates since 1890 the average annual return on housing was just 0.6%. After the 1960s, house values started to increase and the Case-Schiller index going back to 1987 projects a 3.67% annual return on home prices.
Though the return varies depending on geography, in US cities home values increased on average 4% a year. That may seem like a good investment—although 4% is less than average annual stock returns, it’s less risky. However, as many families experienced in the financial crisis, there is still some risk associated with having so much of your portfolio tied up in a single asset acquired with debt.
College doesn’t guarantee financial success but it’s a better bet
College is also a leveraged bet on a single asset, your future earnings. But it is still less risky than buying a house. True, a college degree is not a sure thing either. Some college graduates do earn less than people with only a high school diploma. And the risk increases if you drop out of school or go to a dubious for-profit program resulting in debt without increasing earnings.
Even if you do graduate there is more inequality even among college graduates these days. Recent research argues that much of the recent inequality has emerged among the college graduate population. However, even the average- or lower-earning graduate earns more than a typical non-degree holder. According to the Bureau of Labor Statistics, a holder of a bachelor’s degree earns, on average, 64% more a week than a worker with just a high school degree, and is about half as likely to be unemployed. It is a risky investment in terms of the uncertainty it poses, but if you graduate and go to a decent university, there isn’t much downside risk in terms of life-time earnings. Especially given that a college degree also means a lower likelihood of unemployment and a greater likelihood of finding work after losing a job.
Georgetown University’s Center on Education and the Workforce estimates the net present value of a college education—the extra earnings you get from a degree after tuition and interest on loans is accounted for is $864,000 in the long term (40 years after enrollment), but only $71,000 in the short term (10 years after enrollment). Or, looking at it another way, education is as an asset that offers a return each year in the form of higher earnings, or earnings in excess of what you’d earn with just a high school diploma. If you look at it that way, Brookings estimates the return on investment from a college degree is 15% a year on average (a little more than Georgetown’s, but the results are not directly comparable because they make different assumptions). This may sound optimistic to a recent graduate who is earning less than they hoped. But the benefit of a college degree isn’t necessarily earning more right out of school. An education pays off for an entire career. The median college educated workers wages increased 14.4% between 1978 and 2018. The median high school graduates’ wages fell 12.3%.
College debt isn’t what’s killing home ownership
It is true homeownership is less common among millennials, but it is not because of student debt. Surprisingly, having a college degree (and even the debt associated with it) increases the odds of being a homeowner.
This wasn’t always the case. According to data from the Federal Reserve, in 1989 half of 25- to 35 year-olds with at least a college degree owned a house, roughly the same proportion as non-degree holders. But over time, a gap emerged. In 2016, homeownership ticked up to 51% among 25- to 35-year-old college graduates, while it fell only 34% of non-graduates. The decline in homeownership happened among people without a degree—not student debt-laden college graduates. True, some of these buyers may have parents who had their children take on student loans, and then later helped them buy a house. But overall, these numbers suggest that student debt is not the primary thing preventing home ownership. More student debt tends to come with a higher likelihood of being a homeowner because the biggest debt holders tend to be graduates with professional degrees (like in medicine, law or business) and they earn more.
If being a homeowner is the goal, going to college is the best path to take. Even as the pay-offs become more uncertain and it may delay home ownership, a degree remains one of the best investments you can make.